an assessment of cost escalation in building

* Corresponding author, tel: +234 – 812 – 002 – 0020

AN ASSESSMENT OF COST ESCALATION IN BUILDING

CONSTRUCTION PROJECT

A. Nazif1,*, A. K. Mustapha2 and F. Sani3 1, 2, 3, QUANTITY SURVEYING DEPARTMENT, KADUNA POLYTECHNIC, TUDUN WADA, KADUNA STATE, NIGERIA

Email addresses: 1 [email protected], 2 [email protected], 3 [email protected]

ABSTRACT

Estimating of cost for building construction projects with minimum error at the conceptual stage

of project development is quite essential for planning. This study seeks to evaluate factors

responsible for cost escalation of building construction projects. Questionnaires were

administered to examine and assess these factors. Subsequently, the mean score value of each

factor was determined. In addition, Correlation and Linear regression analyses were used to

establish the relationship between these factors. Factors responsible for cost escalation in

projects were examined as well as the impact of those factors, and occurrence of those factors

on project cost. The result of the analysis showed that, the most agreed factors responsible for

project cost escalation were; inadequate supervision, irregular payment, and design error,

having high mean values of 4.25, 4.20, and 4.15, respectively. Also, correlation analysis result

established that the factors responsible for cost escalation and the impact of cost escalation had

significant R and R2 of 0.81 and 0.70 respectively. Addressing these factors would go a long way

in reducing the escalation of building project cost. Never the less, an effective cost management

strategy is absolutely necessary to safeguard and sustain the construction industry.

Keywords: cost escalation, building project, construction, regression analysis

1. INTRODUCTION

The construction industry plays a vital role in the

welfare of most economies; this includes providing

shelter, infrastructure, and employment [1].

Similarly, the construction sector and construction

activities are considered to be one of the major

sources of economic growth, development and

economic activities [2].

In Nigeria, the construction industry plays a

dominant role in the economic activities of the

country. The construction industry accounts for

about 60 % of the Nation's capital investment and

30 % of the Gross Domestic Product (G.D.P) [3].

Furthermore, the construction industry is said to

have contributed about half of the total stock of

fixed capital investment in the Nigerian economy

[4]. The construction industry also generates

employment opportunities, which place it second to

the Government in the employment of labour [5].

However, there are various problems associated

with the construction industry, particularly during

the construction project process, amongst them is

cost escalation.

Cost escalation is the increase in the amount of

money required to construct a given project above

the initially budgeted sum. It also arises, if the

actual cost of construction is in excess of the

originally estimated amount [6]. Some projects are

being completed at a cost higher than the initial

budge, hence, creating an unsuccessful project

delivery [7]. It was also established that poor

contract could be attributed to the manner in which

the contract was awarded. In some cases, projects

are awarded to the lowest bidder, which results into

various degrees of problems [8]. Some of these low

bidders may have inadequate management skills

and have less regard for contract plans; cost

control; overall site management; and resource

Nigerian Journal of Technology (NIJOTECH)

Vol. 39, No. 4, October 2020, pp. 1029 – 1034 Copyright© Faculty of Engineering, University of Nigeria, Nsukka,

Print ISSN: 0331-8443, Electronic ISSN: 2467-8821

www.nijotech.com

http://dx.doi.org/10.4314/njt.v39i4.8

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AN ASSESSMENT OF COST ESCALATION IN BUILDING CONSTRUCTION PROJECT, A. Nazif, A. K. Mustapha & F. Sani

Nigerian Journal of Technology, Vol. 39, No. 4, October 2020 1030

allocation. In some situations, added cost has been

established to have obvious negative implications to

the key stakeholders in particular, and the industry

at large. To the client, high cost implies added costs

over those initially agreed upon at the onset,

resulting in less return on investment. The added

costs are passed on to the end users as high

rental/lease costs or prices. Also, these added costs

will result in the inability to deliver value-for-money

by consultants; this could tarnish their reputation

and lead to loss of confidence reposed on them by

clients. On the side of the contractor, there could

be loss of profit through penalties for non-

completion, and negative comments that could

jeopardize his/her chances of winning further jobs,

if at fault [9]. Cost management system is a

process that should be carried out throughout the

lifecycle of a project, from the inception to the final

completion and final payment to the contractor. In

the light of this, the timelines and cost effectiveness

of various operations and decisions carried out will

determine to an extent the magnitude of cost that

could be saved on the project [10]. This study aims

at identifying and examining the factors responsible

for cost escalation.

2. MATERIALS AND METHODS

For this study, questionnaires were administered to

respondents that work in various consulting and

contracting organizations that are involved in

various construction projects. A total of 100

questionnaires were administered and 80 were

returned. The questionnaires returned comprised of

60 and 20 questionnaires from consulting and

contracting firms, respectively. In addition, 64 of

the respondents handled both public and private

projects, 12 respondents handled private projects,

while, 4 respondents handled public projects. The

questionnaires were administered to professionals

including; Quantity surveyors, Structural Engineers,

Architects, and Builders. The respondents

comprised of top level management, middle level

management and lower level management staff.

Subsequently, statistical mean scores and standard

deviation were used to analyse the data acquired,

the Likert’s five – point scale was used to analyse

the responses of the respondents.

The formula for mean is:

𝑀 =∑ 𝑓𝑥

∑ 𝑓 (1)

Where: f x = Total frequency and f = Frequency

2.2 Regression Analysis

The relationship between the factors responsible for

cost escalation, the impact of the factors

responsible for cost of escalation, and the

occurrence of factors responsible for cost escalation

were determined using Correlation and Linear

regression analysis. The regression analyses used

for this study are as follows;

2.2.1 Correlation coefficient (R)

Measures the linear association between two

variables. Usually, values of the correlation

coefficient are between -1 and +1. A correlation

coefficient of +1 identifies that two variables are

significantly related in a positive linear logic; a

correlation coefficient of -1 identifies that two

variables are significantly related in a negative

linear sense, and a correlation coefficient of 0

indicates that there is no linear relationship

between the two variables [8].

2.2.2 Linear Regression Analysis (LR)

The general form of LR analysis is as follows:

Yi = β0 + β1X1i + εi (2)

Where Y is the dependent variable (predictant), β0

is a constant coefficient, β1, is referred to as

regression coefficients while X1, (predictor) is the

independent variable and ε is the residual error

(difference between observed and predicted

values) [12].

2.2.3 Coefficient of Determination (R2)

R2 is used to signify how well the model results fit

to the observed data points; it can also be used to

indicate the similarity between the model tendency

and the observed concentration [12].

𝑅2 = [∑ ( 𝑂𝑖 − �̅�)2. (𝑃𝑖 − 𝑃)̅̅ ̅𝑛

𝑖=1

𝑛. 𝜎0. 𝜎𝑝

]

2

(3)

Where, n is total number of annual measurements,

Pi is predicted values, Oi is observed values, �̅� is

the mean observed values, �̅� is mean of the

predicted values, 𝜎𝑝 is standard deviation of the

predicted values, and 𝜎𝑜 is standard deviation of the

observed values.



Table 1: Five Likert Rating Scale Strongly Agree Agree Undecided Disagree Strongly Disagree

Grade Point 5 4 3 2 1

Range 4.5 – 5.0 3.5 – 4.4 2.5 – 3.4 1.5– 2.5 0.5 – 1.4

3. RESULTS AND DISCUSSION

3.1 Mean score Analysis

3.1.1 Factors Responsible for Cost Escalation

in Building Construction Projects

From Figure 1, the main factors responsible for cost

escalation in building construction projects were

assessed using mean score and Likert rating scale.

The factors agreed by the respondents were

inadequate supervision with the highest mean value

of 4.25 and a ranking of 1st, followed by irregular

payment and fraudulent practice and kickbacks

which have the same ranking of 2nd and a mean

value of 4.2, next was differing site condition and

design error having the same mean value of 4.15

and a ranking of 4th, respectively. While the least

favorable factor is adjustment of prime cost sum

with mean value of 3.05 and a ranking of 17th, as

shown in Figure 1. This is in agreement with

previous study that suggested that fraudulent

practices and kickbacks occasioned by greed are

perpetuated by some major players in the

construction industry [10].

3.1.2 Level of Occurrence of Factors

Responsible for Cost Escalation

Figure 2 showed that the irregular payment is a

frequently occurring factor in building construction

projects with a mean value of 4.05 and a ranking of

1st, followed by inadequate supervision with mean

value of 3.70 and a ranking of 2nd, lack of cost

control has a mean value of 3.65 and a ranking of

3rd, and fluctuation of price of materials and

contract management having the same mean value

of 3.45 and a ranking of 4th respectively. While the

least factor is wastages on site which had a mean

value of 2.60 and a ranking of 17th. Therefore, the

data obtained highlighted the factors that bring

about cost escalation in building construction

projects.

3.1.3 Impact of Factors Responsible for Cost

Escalation

Based on the findings in Figure 3, the most

significant factors that are responsible for cost

escalation are design error, extensive variation,

wrong method of estimation, irregular payment,

fluctuation, differing site condition, fraudulent

practice, and kickbacks with mean value of 4.00,

3.80, 3.70, 3.65, 3.65, 3.65, 3.65 and a ranking of

1st, 2nd, 3rd, 4th, respectively.

Figure 1: Factors responsible for Cost escalation

00.5

11.5

22.5

33.5

44.5

Me

an S

core

Factors responsible for cost escalation



Figure 2: Occurrences of Factors Responsible for Cost Escalation

While the most insignificant and least factor is

adjustment of prime cost sum with mean value of

2.50 and a ranking of 17th. In a previous study it

was also established that design error was one of

the factors responsible for cost escalation [12].

Furthermore, the analysis showed that quite a

number of cost escalation factors have been agreed

upon by the respondents in various professions.

The result also revealed that some factors have

significant level of occurrence and influence in

building construction project; this includes irregular

payment, inadequate supervision, and lack of cost

control and fluctuation of price of materials.

Similarly, the result further indicated the most

significant factors which need to be focused more

carefully on so as to mitigate the rise in cost of

building construction projects. These factors include

design error, extensive variation, and wrong

method of estimation, irregular payment,

fluctuations, differing site condition and inadequate

supervisions. In a previous study irregular payment

was also ascertained as a factor that causes cost

escalation in projects [13].

3.2 Regression Analysis Result

3.2.1 Relationship between Factors and

Impact of factors

Based on the linear regression model in Figure 4

and Table 2, a significant relationship was

established for factors responsible for cost

escalation and impact of factors responsible for cost

escalation, having R and R2 result of 0.81 and 0.70,

respectively. These results established that the

factors that have influence on cost escalation and

their impact are significantly related. Also, the linear

regression analysis established that the factors that

influence cost escalation can explain their impact on

cost with 70 % certainty. Also, the P-value was

<0.00 confirming that the analysis is significant.

Moreover, the correlation result for factors

responsible for cost escalation and occurrence of

factors responsible for cost escalation was

significant, having R result of 0.7, however, the

linear regression result was not significant, having

R2 result of 0.45. The P-value was 0.01 which is

>0.00 suggesting that the relationship between the

variables was not significant. Also, the analyses

result for Occurrence of factors responsible for cost

escalation and impact of factors responsible for cost

escalation were not significant both having R and R2

of 0.47 and 0.23, respectively. The P-value also

confirmed the insignificance of the analyses with a

P-value of > 0.06 which is > 0.00.

4. CONCLUSION

The study assessed factors responsible for cost

escalation in building construction project by

identifying factors that leads to cost escalation and

examining the factors that lead to escalation of cost

in building construction projects.

Based on the study findings, the major factors

responsible for cost escalation obtained from the

00.5

11.5

22.5

33.5

44.5

Me

an S

core




professionals in the construction industry were;

inadequate supervision, irregular payment, design

error, differing site condition, and lack of cost

control. Furthermore, it was determined that

irregular payment, inadequate supervision, lack of

cost control and fluctuation were the most

frequently occurring factors in building construction

that causes cost escalation. In addition, the result

also revealed that, design error, extensive variation,

wrong method of estimation, fluctuation of price of

materials and irregular payment were the most

significant factors leading to cost escalation in

building construction project. Also, Regression

analysis established a significant relationship

between factors responsible for cost escalation and

impact of cost escalation, having R and R2 result of

0.81 and 0.70, respectively.

Furthermore, the correlation result of factors

responsible for cost escalation & occurrence of cost

escalation was also significant, having an R result of

0.7, however, the linear regression result was not

significant, having R result of 0.45. More so, the

regression analyses result for occurrence of cost

escalation and impact of cost escalation was not

significant, both having R and R2 of 0.47 and 0.23,

respectively.

Escalation of construction cost can be reduced to a

bearable level by adhering to the following; at the

construction stage, a clear and thorough client brief

should be taken from inception of project to avoid

or minimize excess variation. Others include;

prompt payment of certificate, and employment of

competent contractors and consultants. Also,

constant cross checking of estimates based on

updated price information to avoid any wrong

estimate. More so, proper assessment of details

should be done before embarking on a project and

lastly, professional integrity.

Cost escalation in building construction projects can

be solved or minimized when the factors examined

in this study have been addressed; it will go a long

way in minimizing cost escalation of building

construction projects.

Figure 3: Impacts of Factors Responsible for Cost Escalation

Table 2: Regression Analyses Result

Analyses

Factors Responsible and Impact of Factors


Factors Responsible and Occurrence of Factors


Occurrence and Impact of

Factors Responsible for Cost Escalation

Linear

regression model

y= 0.878x + 0.7011 y = 0.7051x + 1.4811 y = 0.4713x + 1.5565

R 0.81 0.70 0.47

R2 0.70 0.45 0.23

P-value 0.000 0.01 0.06

00.5

11.5

22.5

33.5

44.5

Me

an S

core




Figure 4 Linear Regression Model for Factors Responsible and Impact of Factors Responsible for Cost

Escalation

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Economy; Comparing Thailand with other Economies. International Journal of Project Management 14 (1) 37 – 45, 2013.

y = 0.878x + 0.7011R² = 0.6981

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an assessment of cost escalation in building

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